What’s the difference between a forecast and forecasting?

When preaching about profit and cash-flow forecasting I’ve noticed that sometimes the line between a forecast and forecasting becomes blurred – as if reliable forecasting only requires impressive forecast reports generated by a productizied system. This isn’t the case, of course: instead, a reliable forecast always requires high-quality forecasting. Understanding this is especially important for startups and growth companies along with their stakeholders including board members, investors, and financiers.

A forecast is a report compiled from the information available to the company. A profit and cash-flow forecast combines known items (contract-based revenues and expenses, financial items, etc.) with projected items (with sales being the most important. The reliability of the forecast depends entirely on the forecasting itself, which is an ongoing process that needs to be monitored actively.

Unexpected liquidity issues have a rapid cooling effect on investor relations

If a company’s business is already well established and its kassatilanne can tolerate surprises, a simple simulation of growth (or decline) may well be sufficient for forecasting. For a growth-oriented company, however, it’s a completely different story. A startup’s runway (how long its cash will last) is often somewhat short to begin with, and it should certainly not be shortened further through poor forecasting, such as overly optimistic sales projections. When the money suddenly dries up, conversations with investors cool off fast. If things really go south, losing trust can take the whole business down with it.  

The biggest challenges a startup faces in its forecasting process relate to time, expertise, and tools used. The company often lacks its own financial administration resources, meaning that all financial matters fall on the entrepreneur. The entrepreneur has the best overall understanding of the business, but their time tends to be consumed by day-to-day operations. Adding this to the lack of comprehensive tools to support the forecasting process, many companies end up with forecasts that are little more than guesstimates.

A company should build its profit forecasting into a month-end closing process, where forecasted items are reconciled with actuals and the forecasts are updated accordingly. The success and accuracy of the forecasts should also be actively monitored to improve their reliability. Once profit forecasts become reliable, cash-flow forecasts can be constructed quite accurately based on those asssumed figures.

For forecasting, a company needs a tool that supports the forecasting process – this can be a commercial software product or a self-built Excel-sheet. The tool should support actual-versus-forecast reconciliation and guide the user to adjust the forecast accordingly. For example, forecasted items that did not materialize should be shifted into the future, while items that did occur – but were forecasted for a later period – should be removed from the forecast. In addition, the tool should support monitoring forecast accuracy.

A company’s accounting firm can be a valuable resource in developing this process. However, this requires that the accounting firm understands the typical challenges of a growth company, alongside the forecasting process itself. Unfortunately, this is still somewhat uncommon.